Modeling the supply and demand for tourism: a fully identified VECM approach

Cointegration analysis has gradually appeared in the empirical tourism literature. However, the focus has been exclusively on the demand side, neglecting potentially-important supply-side influences and risking endogeneity bias. One reason for this omission may be the difficulty identifying structural relationships in a system setting. We estimate a vector error correction model of the supply and demand for Hawaii tourism using a theory-directed sequential reduction method suggested by Hall et al. (2002). We compare forecasts for the selected model and for two competing models. Diebold and Mariano (1995) tests for forecast accuracy demonstrate the satisfactory performance of this approach.